Adam Smith Business School

Professor Lorenzo Trapani, Università di Pavia

"A general randomized test for Alpha"
Friday, 27 March 2026. 15:00
Online

Register here

Abstract

We propose a methodology to construct tests for the null hypothesis that the pricing errors of a panel of asset returns are jointly equal to zero in a linear factor asset pricing model -- that is, the null of "zero alpha". We consider, as a leading example, a model with observable, tradable factors, but we also develop extensions to accommodate for non-tradable and latent factors. The test is based on equation-by-equation estimation, using a randomized version of the estimated alphas, which only requires rates of convergence. The distinct features of the proposed methodology are that it does not require the estimation of any covariance matrix, and that it allows for both N and T to pass to infinity, with the former possibly faster than the latter. Further, unlike extant approaches, the procedure can accommodate conditional heteroskedasticity, non-Gaussianity, and even strong cross-sectional dependence in the error terms. We also propose a de-randomized decision rule to choose in favor or against the correct specification of a linear factor pricing model. Monte Carlo simulations show that the test has satisfactory properties and it compares favorably to several existing tests. The usefulness of the testing procedure is illustrated through an application of linear factor pricing models to price the constituents of the S&P 500.

Bio

Lorenzo Trapani is Professor of Econometrics at the University of Pavia and Honorary Professor at the University of Leicester School of Business, having previously been Professor of Econometrics in several leading UK institutions (Bayes Business School, University of Nottingham and University of Leicester). His main research areas are econometric theory and financial econometrics; over the years, he has worked extensively on large factor models (applied to asset pricing), the structural break problem, randomised test and nonlinear time series. Professor Trapani is a Fellow of the Journal of Econometrics, and he has been appointed to the UK Research Excellence Framework 2029 as a panel member for Economics and Econometrics. He has published extensively in top journals in econometrics and statistics, including: Annals of Statistics, Journal of the American Statistical Association, Management Science, Journal of Econometrics, Journal of Business and Economic Statistics and Econometric Theory. He serves as Associate Editor for Econometric Reviews.

Professor Trapani has extensive teaching experience at all levels, having also been Associate Dean for Education at Bayes Business School. He has received numerous prizes for teaching excellence throughout his career

 

ADD IT TO YOUR CALENDAR

---

For further information, please contact business-seminar-series@glasgow.ac.uk.

We foster a positive and productive environment for seminars through our Code of conduct.

First published: 11 March 2026